Consumer prices in Canada are expected to increase an annualized 2.7% after expanding 2.5% in January, and the faster rate of price growth may prop up the Canadian dollar as it raises the scope for a rate hike. As price pressures pick up, the BoC may sound more hawkish going into April, but the central bank may stick to the sidelines throughout 2012 as Governor Mark Carney expects to see a ‘more modest’ recovery across the region.

Recent Economic Developments

The Upside

Release

Expected

Actual

Ivey Purchasing Manager Index s.a. (FEB)

62.0

66.5

Gross Domestic Product (MoM) (DEC)

0.3%

0.4%

Industrial Product Price (MoM) (JAN)

0.3%

0.3%

The Downside

Release

Expected

Actual

Retail Sales (MoM) (JAN)

1.8%

0.5%

Wholesale Sales (MoM) (JAN)

0.3%

-1.0%

Manufacturing Sales (MoM) (JAN)

0.2%

-0.9%

As the economic recovery in Canada gathers pace, the rise in private sector activity may ultimately produce to a higher-than-expect print, and a large uptick in consumer prices could spark a sharp selloff in the USDCAD as market participants raise bets for a rate hike. However, the slowdown in private sector consumption may encourage businesses to keep a lid on consume prices, and a soft inflation reading may lead the BoC to preserve a wait-and-see approach throughout 2012 as the fundamental outlook for the region remains clouded with uncertainties. In turn, the short-term rebound in the dollar-loonie may gather pace going into the end of the week, and we may see the pair retrace the decline from back in February as interest rate expectations falter.

Potential Price Targets For The Release

A look at theencompassing structure shows the USDCAD breaching key trendlineresistance dating back to the November 25thhigh and suggests thatthe pair may continue higher in the days to come. Daily resistancenow stands at the 200-day moving average at parity with a breacheyeing critical resistance at the 61.8% Fibonacci extension takenfrom the October 4thand November 25thcrests at 1.0050.Multiple attempts at a breach above this level over the pastseveral month met with substantial pullbacks and as such we reservethis level as ourtopside limit which ifcompromised offers further conviction on our directional bias.Daily support rests with the 78.6% extension at 9920.

Our 30min scalp chart once again highlights parity which rests with the 78.6% Fibonacci extension taken from the March 1st and the 19th troughs. A breach above this level eyes subsequent topside targets 1.0025 and the 100% extension at 1.0045 with extended targets seen at 1.0070 and the 123.6% extension at 1.0090. Interim support rests at the 61.8% extension at 9975 backed by 9950 and the 38.2% extension at 9930. Should the print prompt a bearish loonie reaction (bullish USDCAD) look to target topside levels with a breach above the 1.0050 offering further conviction on our directional bias.

How To Trade This Event Risk

Expectations for a faster rate of price growth casts a bullish outlook for the loonie, and an uptick in the CPI could set the stage for a long Canadian dollar trade as it fuels speculation for higher borrowing costs, Therefore, if the print crosses the wires at 2.7% or higher, we will need a red, five-minute candle following the release to generate a sell entry on two-lots of USDCAD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in order to preserve our profits.

However, as the BoC sees the economic operating below full capacity well into the following year, the ongoing slack across the region may weigh on price growth, and a soft inflation report could spark a bearish reaction in the Canadian dollar as it weighs on interest rate expectations. As a result, should the CPI fall short of market expectations, we will carry out the same setup for a long dollar-loonie trade as the short position laid out above, just in reverse.

Impact that the Canada Consumer Price report has had on CAD during the last month

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN 2012

2/17/2012 12:00 GMT

2.3%

2.5%

-9

+14

January 2012 Canada Consumer Price Index

The headline reading for Canadian inflation unexpectedly increased 2.5% in January after expanding 2.3% in the previous month, but the uptick in price growth may be short-lived as the Bank of Canada sees the economy operating below full capacity well into 2013. The Canadian dollar advanced against its U.S. counterpart immediately following the above-forecast print, but the loonie struggled to hold its ground during the North American trade as the USDCAD ended the day at 0.9971.

To contact David, e-mail dsong@dailyfx.com. Followme on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comorfollow him on Twitter @MBForex.

To be added to David's e-mail distribution list,send an e-mail with subject line "Distribution List" todsong@dailyfx.com.

To be added to Michael’s email distributionlist, send an email with subject line “DistributionList” to mboutros@dailyfx.com

Questions? Comments? Join us in the DailyFX Forum

View the Expo Presentation on ‘Trading theNews’ For Additional Resources

DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

DailyFX is the
forex news and research arm of
FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.